Customs union
A customs union is generally defined as a type of trade bloc which is composed of a free trade area with a common external tariff.
Customs unions are established through trade pacts where the participant countries set up common external trade policy. Common competition policy is also helpful to avoid competition deficiency.
Reasons for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration. Every economic union, customs and monetary union and economic and monetary union includes a customs union.
WTO definition
The General Agreement on Tariffs and Trade, part of the World Trade Organization framework defines a customs union in the following way:Historical background
The German Customs Union, the Zollverein, which was established in 1834, and gradually developed and expanded, was a customs union organization that appeared earlier and played a role in promoting German economic development and political unification at that time. Before the establishment of the unified German Empire in the 1870s, there were checkpoints between and within the German states, which hindered the development of industry and commerce. In 1818, Prussia took the lead in abolishing the customs duties in the mainland; it was followed by the establishment of the North German Customs Union in 1826. Two years later, two customs unions were established in the states of South Germany. It was brought into action by the initiative of Prussia and joined by most of the German states. Pre-modern conditions were viewed as an obstacle to economic exchange and growth by the new commercial classes, who argued for the creation of a unified economic territory allowing the unhindered movement of goods, people and capital.In 1834, 18 states joined to form the German Customs Union with Prussia as the leader. Thereafter, this alliance was further expanded to all German-speaking regions and became the All-German Customs Union. The contents of the alliance convention included: abolishing internal tariffs, unifying external tariffs, raising import tax rates, and allocating tariff income to all states in the alliance in proportion. In addition, there is a customs union between France and Monaco, which was established in 1865.
A customs union was established by Switzerland and Liechtenstein in 1924, by Belgium, the Netherlands, and Luxembourg in 1948, by the countries of the European Economic Community in 1958, and by the Economic Community of Central African States in 1964. At that time, the European Free Trade Association was separate from the European Economic Community Customs Union. Free trade within the former was limited to industrial products, and no uniform tariffs were imposed on countries outside the Union.
Main features
The main features of a customs union is that the member countries not only eliminate trade barriers and implement free trade, but also establish a common external tariff. In other words, in addition to agreeing to eliminate each other's trade barriers, members of a customs union also adopt common external tariffs and trade policies. GATT stipulates that if the customs union is not established immediately, but is gradually completed over a period of time, it should be completed within a reasonable period, which generally does not exceed 10 years.Protection measures
The exclusive protection measures of a customs union include the following:- Reduction of tariffs until the tariffs within the union are eliminated. In order to achieve this goal, the union often stipulates that the member countries must transition from their current tariff rates between member countries to the unified tariff rates stipulated by the union in stages within a certain period of time, until finally abolishing tariffs.
- Formulation of a unified foreign trade policy and foreign tariff rates. Members must alter their original foreign tariff rates within the prescribed time, and eventually establish a common external tariff; and gradually unify their foreign trade policies, such as foreign discrimination policies and import quantities.
- Formulation of unified protective measures, such as import quotas, health and epidemic prevention standards, etc.
Meaning
- A customs union reduces the national sovereignty of the member countries by taking over their power to set tariffs.
Economic effects
Static effects
There are trade creation effects and trade diversion effects. The trade creation effect refers to the benefit generated by the transfer of domestic production to other countries in the union with lower costs. The trade diversion effect refers to the loss incurred when a product is imported from a non-member country with lower production costs to a member country with a higher cost. This is the price of joining the customs union. When the trade creation effect is greater than the transfer effect, the combined effect on the member countries is a net gain, which boosts the economies of the member countries; otherwise, it is a net loss and a decline in economic terms.The trade creation effect is usually regarded as a positive effect. This is because the domestic production cost of country A is higher than the production cost of country A 's imports from country B. The Customs Union made Country A give up the domestic production of some commodities and change it to Country B to produce these commodities. From a worldwide perspective, this kind of production conversion improves the efficiency of resource allocation.
Dynamic effects
The customs union does not only bring static effects to member states, but also brings some dynamic effects. Sometimes, these dynamic effects are more important than the static effects, which has an important impact on the economic growth of member countries.- One dynamic effect of a customs union is the large market effect. After the establishment of a customs union, conditions are created for the mutual export of products between member countries. This expansion of the market promotes increases in production, which reduce costs.
- The establishment of a customs union promotes competition in the market, by allowing companies from across the union to compete on equal terms. As a result, enterprises will tend to increase research and development investment and continuously reduce production costs, thereby creating a strong competitive atmosphere.
- The establishment of a customs union helps to attract foreign direct investment, both by increasing the size of the market and putting producers in non-member states at a disadvantage. The establishment of a customs union implies the exclusion of products from non-members.
Lists of customs unions
Current
| Agreement | Date | WTO reference |
 Andean Community of Nations.svg.png" />Flag of the Andean Community of Nations.svgProposed
|